I was asked by AdvocateDaily.com to comment on the recent Ontario court decision, 2212886 Ontario v. Obsidian Group.
In that decision, the franchisor and the franchisee had been operating under a franchise agreement. Shortly after the parties had entered into that agreement, the franchisor requested that the parties enter into a new franchise agreement to replace the earlier one. The franchisee sought to rescind the franchise agreement based on receiving a fundamentally deficient disclosure document and commenced a lawsuit to do so. Under Ontario’s franchise legislation, the Arthur Wishart Act, a rescission claim based on fundamentally deficient disclosure must be brought within two years from the date of the franchise agreement.
The franchisee’s lawsuit here was commenced within two years from the execution date of the second franchise agreement, but after two years from the executed date of the first franchise agreement.
The Court held that the two-year rescission period started to run from the date the second agreement was signed, not the first; accordingly, the franchisee’s lawsuit was commenced within the two-year limitation period. The Court granted the franchisee almost $1 million in damages.
This decision should serve as a cautionary tale for franchisors: by asking a franchisee to sign a new agreement, the franchisor runs the risk of extending the rescission period.